Question

When should revenue be recognised? Are there exceptions to the general rule?

Answer 1

Revenue should be recognised when sales take place either in cash or credit and/or right to receive income from any source is established.

Revenue is not recognised, in case, if the income or payment is received in advance or the payment is actually received from the debtors.

In a nutshell, revenue will be recognised when the right to receive income is established.

For example, Mr. A sold goods in January and received payment in February; then revenue is considered to be recognised in the month of January and not in February.

However, if Mr. A received cash in advance, i.e. in December and goods are sold in January, then the revenue is recognised in January and not in December.

The exceptions to this rule are given below:

1) Hire purchase- When goods are sold on hire-purchase system , the amount received in installment is treated as revenue.

2) Long-term construction contract- The long term projects like construction of dams, highways, etc. have long gestation period. Income is recognised on proportionate basis of work certified and not on the completion of contract.